The U.S. Federal Reserve raised its benchmark interest rate to a range of 3.75% to 4%, in the first increase since July 2023. The decision could strengthen the dollar and make international financing more expensive, but economists believe domestic factors should limit the immediate impact on the guarani.
The adjustment comes against a backdrop of inflation still above the U.S. target of 2%. In August, the consumer price index had risen 3.4% year on year, while higher oil prices increased risks to energy costs. The decision also intensified discussion about the monetary authority’s independence amid pressure from President Donald Trump, who advocates interest rates of 1% or lower to encourage investment and the reindustrialization of the United States.
For Paraguay, higher U.S. interest rates tend to reduce the relative advantage of assets denominated in guaranis. If the difference between the U.S. rate and the policy rate of the Central Bank of Paraguay (BCP), the institution responsible for the country’s monetary policy, narrows, investors may increase their exposure to the dollar and change the composition of their portfolios.
Rodrigo Ibarrola, an economist and researcher at the Center for Analysis and Dissemination of the Paraguayan Economy (Cadep), said that this interest-rate differential is more relevant at this point than an immediate and substantial outflow of capital. He said Paraguay’s trade surplus and increased foreign-exchange inflows from foreign direct investment could offset part of the external pressure.
Manuel Ferreira, an economist and former finance minister, described the adjustment as small and said its effects on the dollar in Paraguay’s market could be limited. In his assessment, the local exchange rate has been influenced mainly by dollar inflows, including after the government’s debt issuance in February.
Another variable will be the strategy adopted by the Ministry of Economy and Finance for the next public financing operation. Ferreira said the government will have to choose between issuing debt in guaranis or dollars and cited a need for US$1.27 billion. If the bonds are issued in guaranis, the dollars investors use to buy those securities would have to enter the country and be converted, which could push the U.S. currency’s exchange rate lower. A dollar-denominated operation would have a different foreign-exchange effect.
Ibarrola estimated that the dollar could end 2026 between G. 5,900 and G. 6,100, a range close to the one projected in the BCP’s expectations survey, but stressed that it is still too early for a firm forecast. For now, he sees no sufficient reason for the central bank to raise its rate: inflation remains low, and the exchange rate is monitored as a channel through which prices are transmitted, not as an isolated objective.
The scenario could change if the Federal Reserve raises rates again before the end of the year. In that case, the outcome will depend on the interaction between the interest-rate differential, export performance, the balance of payments, investment flows and the Paraguayan government’s decisions about borrowing.